SAO PAULO/RIO DE JANEIRO, June 21 (Reuters) - South Korea'sPosco and other steel mills want to return to annualcontracts with iron ore miners, Posco's chief executive said,suggesting volatile prices and a gloomy global economy arenudging miners back to the age-old system.

Chung Joon-yang's comments on Thursday exposed the sector'sfragility amid weak demand, and is the strongest sign yet ofdiscontent over the current spot-based pricing system, which hasdeeply hurt margins of steel mills given wild price swings.

Vale chief executive Murilo Ferreira said theworld's largest iron ore miner was prepared to negotiate withcustomers over their preferred price-setting system but wouldnot allow switching back and forth at will.

"Whatever customers consider most appropriate, we will doit. What we can't have is opting for one price mechanism andchanging again two months later. Not this," Ferreira said duringan event at the Rio+20 conference on sustainable development.

The 2008-09 financial crisis caused the global steel sector,led by Chinese mills, to jump ship on the annual contract systemto take advantage of falling spot market prices for iron ore.

Brazil's Vale followed its Australian rivals Rio Tinto and BHP Billiton to price iron ore on aquarterly and eventually monthly or spot market system.

But Chung, head of one of the world's leading steelmakers,said producers needed the stability that the former systemprovided, enabling companies to predict costs more accurately.

"We hope Vale and others will go back to the old system (ofannual pricing)," Chung said at a separate event in Sao Paulo onThursday.

"That way (steel) companies are more stable. Other steelcompanies want to go back to the old system," he said, withoutspecifying which ones.

A spokesman for Nippon Steel, the world's No.4steelmaker, declined when asked for a response to Ferreira'scomments.

WEAK DEMAND

Shinya Yamada, an analyst at Credit Suisse in Tokyo, said:"Steelmakers are struggling from weak demand and decliningmargins and are looking for stability as that would make iteasier for them to negotiate prices and recover costs in talkswith their long-term users."

At $137.40 a tonne, the price of iron ore isstill more than double its low in 2009 during the last globalfinancial crisis - about a year before the four-decade oldannual pricing system gave way to a more flexible quarterlyscheme.

Prices neared $200 a tonne in February 2011 for thesteelmaking raw material, the biggest revenue earner for Vale,BHP Billiton and Rio Tinto. Prices have stayed above $100 sincelate 2009, more than double the production cost of bigproducers.

A move back to the annual benchmark could hurt Vale if itlocked in prices with mills now, only for them to start climbingsubsequently if a pick-up in the economy of key customers likeChina pushes up demand for the steel ingredient.

China, which buys around 60 percent of the world's seaborneiron ore and had resisted the move away from the annual pricingsystem, would be the big winner. However, Chinese buyers havealso been known to renege quickly on contracts if prices don'tsuit them, as happened during the 2008-09 global crisis.

Just last month, some Chinese steel mills postponed deliveryof iron ore from miners, seeking to tweak contract prices afterspot rates fell to their lowest for the year and as they dealtwith sluggish steel demand at home. Chinese buyers employed thesame strategy in October 2011.

U.S. steelmaker RG Steel LLC filed for Chapter 11 bankruptcyprotection on May 31, however, citing deteriorating marketconditions, underscoring the vulnerable state of the industry.

THYSSENKRUPP CSA STAKE?

Separately, Chung said Posco was studying the possibility ofbuying a stake in ThyssenKrupp AG's CSA steel slabmill in Rio de Janeiro.

"We just received information on CSA, operated by Thyssen inBrazil, and we are reviewing it internally," Chung said in SaoPaulo. "I'm not in a position to say yes or no (about a stakeacquisition) but we are definitely analysing it at the moment."

News reports surfaced over recent weeks that Posco and Vale, which holds 27 percent of CSA, were consideringbuying out Thyssen's stake in the mill.

Vale has said it is not interested in taking a controllingstake in steel mills but did not rule out potentially increasingits holding in CSA. Vale says it is cautious about raising itsprofile in steelmaking as it does not want to turn into acompetitor with its own customers for iron ore supplies.

Chung said Posco has not been in talks with Valeover possible participation in CSA. He also said Posco wasstudying a possible stake in Thyssen's Alabama steel plant.